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How do you minimize 401(k) expenses?

October 22, 2012: 6:30 AM ET

When I looked at the funds offered in my girlfriend's 401(k) plan, I noticed that almost all of the funds had maintenance fees of more than 1.65% and a 1% deferred load. Is this common for 401(k)s? Are there ways to minimize her 401(k) expenses? — Brian

You are right to be concerned, since those fees are fairly high. By comparison, MONEY recently reported that average annual expenses for plans of various sizes ranged from 0.36% in the biggest plans to 1.4% in the smallest. (For more detail on 401(k) fees, go to From year to year, the high fees in your girlfriend's plan could be a serious drag on returns.

One way to minimize the impact of fees is to look for passively managed index funds, which are likely to be the cheapest offerings available in her 401(k). If her plan doesn't currently offer index funds, she might consider lobbying her employer or plan sponsor to bring in some lower-cost options.

If she has done what she can to lower fees, she should continue to fund her 401(k) in order to receive any employer matching. That's free money, and even with the slightly higher fees, it will provide a net boost to her retirement savings. But she might consider making contributions beyond that amount to a self-directed IRA or Roth IRA. Just be aware that contributions to IRAs are limited to $5,000 per year ($6,000 for those 50 or older), which is much lower than the current annual 401(k) contribution limit of $17,000 (or $22,500 for those 50 or older).

The key benefit of IRAs to your girlfriend is that they typically feature a much broader range of funds than the average 401(k) plan. Many of these options, such as ETFs, charge lower fees than the average equity mutual fund.

— Marc Mewshaw

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